Cutting the VAT on food could ease Estonia’s high prices, making the country cheaper and more competitive, economic analyst Heido Vitsur said.
Vitsur noted that even Sweden, with its strong competitiveness, lowered the VAT on food to maintain its edge. He said Estonia should consider the same to cut costs, rather than debating canceling an income tax hike.
He explained that VAT always flows into prices, while income tax affects behavior and raises demand, which can even fuel inflation.
“If we want to make ourselves cheaper or slow price growth, the only way to do that is take steps that lower prices,” Vitsur said. “Sweden didn’t do it just for fun.”
Vitsur said the pressure on prices comes specifically from food, where Estonia is among Europe’s most expensive countries.
“Not overall prices, but food prices,” he emphasized. “As far as I know, the only other country in Europe with the same VAT on all goods is Denmark. Elsewhere, food VAT is much lower — in Sweden, for example, it’s around 6 percent, about four times below the standard rate.”
Peeter Raudsepp, director general of the Estonian Institute of Economic Research (EKI), said that lowering the VAT on food would cut prices in a competitive market, but warned against expecting a freeze in costs.
“The economy is dynamic and prices change anyway,” Raudsepp explained. “If we are number one in EU inflation now, we’re gonna remain a high-inflation country.”
He gave an example: even if food VAT were cut 11 percentage points, a 5 percent annual raise in prices would quickly erase the impact.
Other countries’ cuts have worked, he acknowledged, but the aim must go beyond easing household budgets; the food sector needs to recover from crisis and return to growth as well.
“We’re already seeing that people’s purchasing power will not improve in the second half of the year; it will worsen,” Raudsepp said. “That’s why I call [this] a crisis. It’s bad now, and shows every sign of worsening.”
He said it’s very likely Estonia will cut VAT on food, but when remains unclear.
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